Student Loan Repayment Guide

Welcome to the Make Lemonade Student Loan Repayment Guide

You’ve done your homework, explored your student loan refinancing options, understand which student loans you have and how much you are paying currently, but you still aren’t sure if you are on the best student loan repayment plan for your budget. You dive into all of the options for student loan repayment, but now you find yourself feeling like you’ve got more choices than a Chinese Buffet.

Don’t stress, this will be easier than deciding between the General Tso’s or the Sweet and Sour. Explore our easy to follow Make Lemonade Student Loan Repayment Guide below and we will help you figure out which options can meet your student loan repayment needs. Make Lemonade explores Student Loan Forgiveness as well, but this student loan repayment guide is for those borrowers looking at the student loan repayment options, when student loan forgiveness is not an option for you.

The first thing you need to know is that there are two groups of student loan repayment plans to look out for. The first group contains the traditional student loan repayment plans. These plans are what you will originally be offered when your student loan repayment period starts. They have nothing to do with how much you earn or how much you borrowed and can be used to repay just about any kind of student loan.

The second group of student loan repayment plans are options for borrowers to structure their student loan repayment based on their income. These plans each have specific benefits and limitations. In most cases, these student loan repayment plans reduce your monthly payments, but may extend the life of your student loan. These plans are only available to certain federal student loans. While the highlights of the student loan repayment plans are below to help you compare – as with any dotted line you planning on signing your name to – we encourage you to read the fine print before making it final!

Traditional Student Loan Repayment Plans

Before the federal government instituted repayment plans, traditional student loan repayment plans were the only options for student loan repayment and in many, although not all, cases they still can offer an effective strategy to pay down your student loans. Under these student loan repayment plans, you will be responsible for paying off your student loan debt yourself, but you can control how quickly you pay it and how much you pay at a time. Let’s take a look at the federal student loan repayment options.

Standard Student Loan Repayment

Standard Student Loan Repayment is just what is sounds like. Take no action and this is likely where you will land. All student loans are eligible for this type of student loan repayment and the maximum term is 10 years. Payments are fixed and because you make a higher monthly student loan payment compared to other student loan repayment plans, not only do you pay your student loans quickly, but also you pay less over the long term. Take that, interest and compound interest!

Extended Student Loan Repayment

The Extended Student Loan Repayment gives you a little breathing room and does exactly what it suggests – extends the length of your student loan repayment. How do you know if this student loan repayment plan is right for you? Well, if you’re staring down the barrel of a monthly student loan payment on a 10-year plan and thinking…what was I thinking?! You were planning on making a student loan repayment every month on time, but when you start dividing what you borrowed by 10 years, and then 12 months and adding interest and compounding interest, the math does not compute. By repaying your student loan for a longer period of years, you have the ability to make smaller monthly student loan payments. The major drawback to this approach is of course the interest that accrues and compounds and accrues and compound and…. yeah, that.

Payments Based On What You Earn

Payments Based On What You Earn, otherwise known as Income Driven Plans, are only available for certain federal student loans (not private student loans), and they use different formulas to calibrate your student loan payments based on your income. The federal student loans generally must be consolidated under the Federal Direct Loan Program (FDLP) or must be paid through the Federal Family Education Loan Program (FFEL). You have to apply for these programs through the U.S. Department of Education. If you qualify, these student loan repayment plans almost always result in lower monthly student loan payments and student loan forgiveness as to any remaining balance at the end of the student loan repayment tern. You will pay income tax on the remaining amount to be forgiven (only in the year it is forgiven).

Income Contingent Repayment

Income Contingent repayment, or ICR is, like all of IDR plans, directed at reducing the burden of repaying high student loan debt on borrowers with lower income. It specifically considers those borrowers working in public service. In order to qualify for ICR, you must have consolidated your student loans through the FDLP student loan consolidation. Parent PLUS Loans are not eligible for the ICR program, but Direct Parent PLUS Loans, which are part of a student loan consolidation, are eligible. The maximum student loan repayment period under this plan is 25 years. Like all IDR plans, at the end of the student loan repayment period, any remaining debt is forgiven. The student loan interest rate is fixed, but you are not locked into ICR for life and you may switch plans if you choose. Unpaid student loan interest can only be capitalized at 10 percent of the original loan amount. Your student loan payment will change every year depending on your income and family size. Depending on those numbers, if your salary increases, you could be repaying your student loan at a rate even higher than the 10-year standard student loan repayment plan. You can calculate your monthly student loan payments and student loan forgiveness with the Make Lemonade Student Loan Income-Contingent Repayment (ICR) Calculator.

Income Based Repayment

Income Based Repayment, or IBR, requires you to have a partial financial hardship to qualify. IBR generally has a broader reach than ICR and is available under both FFEL and FDLP. Neither Parent PLUS loans nor Direct Parent PLUS loans are eligible.

Under IBR, monthly student loan payments will generally be 10 percent of your discretionary income if you’re a new borrower on or after July 1, 2014, but these payments will never be higher than the 10-year standard repayment plan. If you’re not a new borrower by that date, you are looking at a monthly student loan payment capped around 15% of your discretionary income.

That said, your student loan payment will never be set at a rate higher than the 10-year standard repayment plan. Depending on when you borrowed, your student loan repayment plan will either be 20 or 25 years. As with all of the IDR plans – at the end of the student loan repayment period, the remaining balance is forgiven.

Don’t forget – you have to recertify every year. If your income goes up, so will your student loan payments, but under IBR, payments will never exceed the 10-year standard student loan repayment rate.

Pay As You Earn (PAYE)

Pay As You Earn, or the PAYE plan, was created in 2012 in order to relieve student loan debt and was specifically directed at students graduating that year. As a result, PAYE has very specific requirements and is only available to a narrow group of borrowers. However, if you graduated in 2012 (or if you took out loans after Oct 1, 2007 and received a disbursement after October 1, 2011), this student loan repayment plan could be for you. Like IBR, you must prove that a 10-year standard repayment plan will not be affordable for you. Generally, payments are capped at 10 percent of your discretionary income, but like IBR, even if your income goes up, payments will never be higher than the 10-year Standard Repayment Plan amount.

You can calculate your monthly student loan payments and student loan forgiveness with the Make Lemonade Pay As You Earn (PAYE) Calculator.

One More Thing…

I heard about this Public Service Loan Forgiveness Program – isn’t that a student loan repayment plan?

No, not exactly, but certain borrowers can be eligible for student loan forgiveness after making 120 qualifying payments if they enroll in the Public Service Loan Forgiveness Program.

Payments made under any of the four IDR plans will count as a qualifying payment to put you on the road to student loan forgiveness.

Who are the “certain borrowers” you ask? Borrowers that qualify for Public Service Loan Forgiveness Program and ultimate student loan forgiveness will work full time for either 1) a government organization; 2) a tax exempt 501(c)(3) not-for-profit organization; or 3) certain other not-for-profit organizations who provide qualifying services.

Revised Pay As You Earn (REPAYE)

Revised Pay As You Earn, or the REPAYE plan, was announced as a revision to the PAYE program. Unlike PAYE, which is targeted at 2012 grads, REPAY is available to anyone with federal direct loans. Also unlike PAYE, you do not have to prove that the 10-year standard repayment program is unaffordable for you, so borrowers at any income level can apply.

If you are paying on student loans for undergraduate studies, your student loan payments will end after 20 years, and if you are paying on loans for graduate or professional study, your student loan payments will end after 25. Generally, student loan payments will be capped at 10 percent of your discretionary income. REPAYE also provides an interest subsidy payment to borrowers in cases where payments under the REPAYE plan cannot keep up with accrued interest on the student loans.

One word of caution – like the ICR plan – if your income ever spikes, you could find yourself making very high payments. You must recertify every year and student loan payments will always be based on income (and will never be capped, even at the 10-year standard rate).

You can calculate your monthly student loan payments and student loan forgiveness with the Make Lemonade Revised Pay As You Earn (REPAYE) Calculator.

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